Do you wish to familiarize yourself with the basics of cryptocurrencies? If the answer is yes, then you absolutely have to learn about crypto wallets, especially if you want to protect your hard-earned money. In this article, we will explain everything about the different types of crypto wallets and what you need for safe storage of cryptocurrencies. We will explore reasons for using digital wallets, how they differ, and which one is best suited to your needs.

Bitcoin wallet: what is a bitcoin wallet and why is it necessary?

If you are already using online banking, then you won’t have a lot of problems with the understanding of crypto wallets. In both cases, we are talking about fully digital wallets that store your funds, while access is restricted at least with a password, which is usually known only by the owner of the account.

The fundamental difference is that the bank always retains control of your assets and can freeze them at any time, while you are always completely in charge of your crypto assets.

This effectively makes every crypto user their own bank, which is why cryptocurrencies demand slightly different security measures. For example, in the event of theft, no one can help you recover the stolen assets due to the decentralized nature of cryptocurrencies. There is no central authority that will be able to reverse transactions and return your funds.

Wallet owners are the only ones who have access to their assets, so no one can freeze their funds, but it is vital that they don’t lose their wallet credentials. As a result, wallets are critical for safe crypto storage. But don’t worry, it’s not as scary as it might seem at first glance! Everyone can easily go through the necessary steps to make sure that their digital assets are in safe hands.

Bitcoin wallet: a detailed description of how crypto wallets work

A Bitcoin wallet is always made of two parts. The first part is the public key of the wallet (also called a public address), which can be shared with others. The second part is a private key, which must never be revealed publicly.

We say that a Bitcoin wallet is made with a pair of cryptographic keys. You can imagine a public Bitcoin address as your email address and a private key as your password.

A private key is used to encrypt transactions while the public key is used for decryption. This is why the private key has to be kept safe. Anyone who has access to a private key is also the owner of the wallet. The public key is for sharing with third parties and it is used as proof that you are the owner of the Bitcoin address.

The combination of private and public keys creates a digital signature. It’s a special type of digital cryptography that aims to create a secure digital reference on the identity of the wallet holder. Digital signatures prove ownership and allow you to control your assets.

Perhaps this will surprise you, but a Bitcoin wallet can also be written on a piece of paper. It simply contains a public and private key written in plain text and with respective QR codes. That’s all you need for safe storage because Bitcoin can’t be stored in any one location; say as a digital file on a USB drive. All Bitcoin information is stored on a decentralized blockchain that is maintained by thousands of people around the world.

The very nature of digital files is such that it is not difficult to duplicate them indefinitely. Filmmakers and musicians have been facing this issue ever since the advent of the internet and peer-to-peer technology.

If cryptocurrencies were operating on the same principle, then the whole thing would collapse pretty rapidly because anyone could create new coins indefinitely. The blockchain technology prevents this, and you can learn more about it in our article about crypto mining.

When you try to send Bitcoin, the miners on the blockchain check if it’s even possible to send the desired amount. In other words: the miners check the entire history of your transactions because your Bitcoins aren’t stored on a single physical location.

In this context, Kriptomat gives you access to a user-friendly crypto wallet where you can safely store all supported cryptocurrencies. We effectively act as a bank account for your digital currencies. But you can also freely send them to your private coin wallet.

Now that we better understand crypto wallets, we can focus on the different categories and types of crypto wallets that are designed for different needs.

Bitcoin wallet: different types of crypto wallets

The crypto wallets are divided into two basic categories:

Hot wallets – constantly connected to the Internet,

Cold wallets – not connected to the Internet,

and four basic subcategories:

Hardware wallets – public and private keys are stored on a separate hardware device and written in digital form while access is locked at least with a password,

Paper wallets – public and private keys are written on paper (they can also be written on a more durable material for long-term storage),

Software wallets – public and private keys are stored on a computer program and written in digital form while access is locked at least with a password.

Each of the listed wallets has its advantages and potential disadvantages. We will briefly examine them in the next chapter.

Bitcoin wallet: advantages and disadvantages of different types of wallets

Hot wallets (Online, Mobile)

Advantages: These wallets are usually implemented on various online services that also allow you to trade cryptocurrencies. As a result, you can perform a virtually unlimited number of transactions in a quick and easy way. Online and software wallets are usually very cheap or even free (because they are often open source). Mobile wallets can be very convenient because most people have smartphones. They are easy to use when making transactions because you can use your phone camera to scan the QR code of a receiving crypto wallet address.

Disadvantages: A wallet that is permanently connected to the internet has a very obvious weakness because it is susceptible to hacking attacks. As such, it isn’t suited for long-term storage, unless you really trust the owners of the service that offers the wallet.

Cold wallets (Hardware, Paper, Software)

Advantages: These wallets aren’t connected to the internet, which makes them very safe for long-term storage. The internet connection is established only when you’re sending cryptocurrencies. There is no need to establish an Internet connection when receiving cryptocurrencies because there is no need to confirm transactions as a receiving party. The transaction is carried out on the blockchain where the entire transaction history of your wallet is stored. The sender only has to know your public address. This also makes cryptocurrencies ideal for donations. An additional advantage is that you can get a completely free bitcoin wallet, especially if you use a paper wallet.

Disadvantages: Frozen foods have to be defrosted before you eat them. Cold wallets are similar because you must first connect them to your computer. This makes the entire process a bit longer, and beginners may have some difficulties setting it up. Another potential disadvantage is that hardware wallets can be expensive, but the price is usually compensated with additional security.

Bitcoin wallet: main advice

As we have learned, hot wallets are connected to the internet. If we go by this definition, then every wallet is a hot wallet at the moment when you are sending cryptocurrencies. And if you use paper wallets, then you have to send all of your funds because there is currently no interface that would allow you to send a portion of what is stored on the wallet. Paper wallets should, therefore, only be used for very long-term storage.

You also have to understand that not every online Bitcoin wallet is hot – some of them only have an online interface that lets you manage your funds. An example of such an interface is MyEtherWallet.

Cold wallets are considered to be much safer, so they are usually recommended for storing large quantities of your digital assets. Hot wallets, on the other hand, are more suitable for frequent access to your assets and trading.

In conclusion, it is good practice to use cold wallets for long-term storage, and hot wallets for regular use and trading.

Bitcoin wallet: which wallet should you choose?

Before choosing a crypto wallet, explore the options and ask yourself about your wants and needs. Do you prefer to use a mobile phone or a computer? Are you comfortable with an external USB device? Are you buying for long-term storage, or will you often use cryptocurrencies?

What is “master seed”?

You may have noticed that I continually stressed the importance of keeping the “master seed” of your wallet safe. We can also call it a master password.

Master seedis the key to your cryptographic secrets and it is not just a common password or PIN. It is a collection of randomly selected words generated by your device at the initial setup. If you lose access to your device, then you can unlock access to your assets on another device of the same type with this set of words.

The most often used standard is the BIP 39. As a result, your device uses a 2048-word set to generate 2256 different combinations of the master seed that consists of 24 words. If that number doesn’t seem high, or if you have a hard time imagining exponential numbers, then let’s take a look at 2256 in its fully written form: 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,665,640,564,039,457,584,007,913,129,639,936.

That is approximately 1.158 x 1077

In comparison, it is estimated that there are 1050 atoms on Earth, so you can imagine that the chance of anyone guessing (or brute-forcing) your master seed and thus gaining access to your assets is astronomically low.

Bitcoin wallet: how to start?

In any case, we recommend that you also learn about crypto wallets on your own. Never take anyone’s word for it, even our own! Do your own research or DYOR is a mantra that is often repeated in the crypto world, and it is especially true when we are talking about the safety of our digital assets.

Conclusion

You must always consider the fact that you are solely responsible for your own digital assets. Make sure that you safely store your private key and master seed! Preferably offline and in a secure vault.

Online wallets are the easiest ones to use, even for beginners, and they also support the fastest transactions. On the other hand, they are generally less safe in comparison with cold wallets.

Software wallets are also safe, but you need to be sure that your computer is not infected with any kind of virus that could meddle with your transactions. There is no such worry with Hardware wallets because every transaction must be manually verified on a securely encrypted device. However, hardware wallets can be more difficult to use.

We hope that we have helped you with the understanding of crypto wallets. If you still have any questions, you can post them in the comments section below and we will be happy to answer as soon as possible! 🙂